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Section 14A of income Tax Act

Posted @ April 18, 2013, 4:04 am under (Income Tax Updates)

Section 14A
 
As per section 14A in computing the total income of an assessee, no deduction shall be allowed in respect of expenditure incurred in relation to income which does not form a part of the total income under the Act.   The disallowance was computed towards expenditure at the rate of 0.5% of the investment.
The Hon’ble jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81 has held that the disallowance u/s 14A is required to be made as per Rule 8D in relation to the assessment year 2008-09 and subsequent years.
 
New Rule 8D :
 
    2.1 In exercise of the powers given in S. 14A(2) C.B.D.T. has issued a Notification No. S.O. 547(E) on 24-3-2008 (299 ITR (ST) 88). This notification amends the Income-tax Rules by insertion of a new Rule 8D providing for a "Method for determining amount of expenditure in relation to income not includible in total income". Reading this Rule it is evident that the Rule provides for disallowance of not only direct expenditure incurred for earning the exempt income but also for disallowance of proportionate indirect expenditure. This is clearly contrary to the main objective with which S. 14A was enacted.
 
    2.2 Broadly stated, the new Rule 8D provides as under :
 
        (i) The method prescribed in the Rule is to be applied only if the AO is not satisfied with :
 
        (a) The correctness of the claim of expenditure incurred for earning the exempt income made by the assessee or
 
        (b) The claim made by the assessee that no expenditure has been incurred for earning exempt income.
 
        (ii) The method prescribed in the Rule states that the expenditure in relation to income which does not form part of the total income shall be the aggregate of the following amounts :
 
        (a) The amount of expenditure directly relating to income which does not form part of total income.
 
        (b) In the case of interest on borrowed funds which is not directly attributable to any particular income or receipt, the amount computed in accordance with this following formula :
 
        A x
       
          B
          C
 
            A = Amount of interest, other than the amount of interest which is directly attributable to the exempt income stated in (a) above.
 
            B = The average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the relevant accounting year.
 
            C = The average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the relevant accounting year. The term ‘Total Assets’ means total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets.
 
        (c) An amount equal to ½ % of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the relevant accounting year.
 
 
 
 
 
 
    In this respect reference may be made to some of the decisions wherein it is held that disallowance can be made u/s.14A in respect of income from agricultural income, dividend on shares or units of Mutual Fund, Share from Partnerships Firms, income exempt under Chapter VIA, etc.
 
    (i) Agricultural Income : Haryana Land Reclamation & Development Corp. v. CIT, 159 Taxman 271 (P & H).
 
    (ii) Dividend on shares and units of mutual funds : Wallfort Shares & Stock Brokers Ltd. v. ITO, 96 ITD 1 (Mum.) (SB), Harish Krishnakant Bhatt v. ITO, 91 ITD 311 (Ahd.), DCIT v. S. G. Investments & Industries Ltd., 89 ITD 44 (Kol.), Muruti Udyog Ltd. v. DCIT, 92 ITD 119 (Del.), Shree Synthetics Ltd. v. CIT, 205 CTR 386 (MP), Escorts Ltd. v. ACIT, 102 TTJ 522 (Del.).
 
    (iii) Share of Profit from Firm : Sudhir Dattaram Patil v. DCIT, 2 SOT 678 (Mum.), A. H. Baldota v. ACIT, 103 TTJ 517 (Mum.), Marezban Bharucha v. ACIT, 12 SOT 133 (Mum.).
 
    (iv) Tax Free Bonds : Punjab National Bank v. DCIT, 103 TTJ 908 (Del.).
 
    (v) Chapter VIA Income : Punjab State Co-operative Milk Producers Federation Ltd. v. ITO, 104 ITD 408 (Chand).
 
 
 
As per sub rule 2 of Rule 8D, the expenditure in relation to income which does
not form part of the total income shall be the aggregate of following amounts –
(i) the amount of expenditure directly relating to income which does not form
part of total income;
(ii) in a case where the assessee has incurred expenditure by way of interest
during the previous year which is not directly attributable to any particular
income or receipt, an amount computed in accordance with the following formula
-
A = amount of expenditure by way of interest (other than the amount of interest
directly relating to income which does not form part of total income) incurred
during the previous year.
B = the average of value of investment, income from which does not or shall not
form part of the total income, as appearing in the Balance Sheet of the
assessee, on the first day and the last day of the previous year.
C = the average of total assets as appearing in the Balance Sheet of the
assessee, on the first day and the last day of the previous year.
(iii) an amount equal to 0.5% of the average of the value of investment, income
from which does not or shall not form part of the total income, as appearing in
the balance sheet of the assessee, on the first day and the last day of the
previous year.
Further, the term ‘total assets’ has been defined to mean total assets as
appearing in the Balance Sheet excluding the increase on account of revaluation
of assets but including the decrease on account of revaluation of assets.
 

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